China has surpassed the World Bank as the World’s Largest Creditor

The opaque lending of China to developing countries has missed the eyes of the World Bank and other regulatory institutions. The reporting is far from transparent, as one would assume that the Chinese prefer to do their credit work under the radar. With that said, let’s try to establish some data points.

“Between 2000 and 2017, other countries’ debt owed to China soared ten-fold, from less than $500 billion to more than $5 trillion,” according to the study from Germany-based think tank the Kiel Institute for the World Economy.

“For 50 developing countries which have borrowed from China, that debt has increased on average from less than 1% of their GDP in 2015, to more than 15% in 2017,” according to estimates by the study’s researchers.

I did the math. That is an increase of 14% of GDP  in 2 years!

Now that we have a peek into the numbers, who is it who is on the hook to China for this $5 trillion? Loan talks with Belarus, funding for bridges in Liberia, a possible gas project in Timor-Leste, and pledges to support the Rwandan private sector are but a few happening in the last month or so. While the size of this lending wave is large, it is not its most distinct characteristic.

What is truly remarkable is how little anyone other than the immediate players know about this. We have seen this movie played out before. Poor country borrowers’ external debt obligations may have reached the point where repayment difficulties have begun to emerge, leaving China’s development banks with considerable exposure to risky or nonperforming sovereign loans.

According to Carmen M. Reinhart, professor of the international financial system at Harvard University’s Kennedy School of Government, “I suspect widespread debt-servicing difficulties are on the rise among many of the world’s poorest countries. China’s tendency to favor collateralized loans raises particular challenges.” The terms of such loans may well affect the seniority among lenders, typically placing official bilateral loans at the bottom.

What isn’t mentioned by the academician is a more nefarious approach by China to call in its outstanding debt and take possession of the actual underlying collateral. Perhaps this is part of the larger scheme of the Belt and Road Initiative.

This collateralized debt hasn’t gone totally under the radar. Last year, the World Bank referred to one such instance of Chinese loans to Venezuela, which were denominated in barrels of oil. The regions most indebted to China are countries in central and Far East Asia, such as Laos and Cambodia, with those in Latin America next on the list.

Perhaps it is as simple as China filling a credit void. While the official institutions lend to developing countries at below-market interest rates, China often lends at market rates and at shorter loan periods, thus increasing the odds of such debt becoming distressed. While a remote possibility, China, in longing for economic respect, could be adding to its repertoire the idea of ousting the dollar for the yuan as the global standard. This would be a stretch even for Chairman Xi.

About John Thomas

John Patrick Thomas is a four-time cancer survivor who lives with his family in South Florida. John attended Gettysburg College and The American University before embarking on an entrepreneurial career on Wall Street. He turned to the teaching profession after his life-threatening bout with bone cancer. John has recently written a #1 Amazon Cancer Bestselling book entitled, “A Call to Faith, the Journey of a Cancer Survivor.” He has appeared in publications such as The New York Times, The Wall St. Journal, The Washington Post, Memorial Sloan-Kettering Cancer Center publications, and was featured in new DayStar network series, “Impact with Pastor Dave.” He has traveled as a missionary and may be one of the few people that tell you cancer was the best thing to ever happen to him. You’ll have to ask him why.

One comment

  1. What’s wrong with lending at market rates, securing your loans, and enforcing your security in the case of non-payment? Any sane lender does these things. What’s wrong is that the West’s social justice luvvies squander taxpayer money on loans where these obvious precautions have not been taken – because it’s not their money!

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